Durex maker SSL expands its Russian business

SSL International, the Durex group, is increasing its presence in the Russian condom market by raising its stake in its BLBV joint venture.

SSL is taking its stakeholding to 75% by buying 25% for no more than £140m in cash and shares. It has an option to buy the rest in 2011, but the total cost is higher than an initial proposal to take full control by buying 50% in one tranche. Analysts at Credit Suisse kept their outperform rating on the shares and raised their target price from 750p to 800p. But they lowered their earnings estimates for 2009 and 2010 by 2%, but increased their forecast for 2011 by 6%. They said:

SSL has announced a revision of the terms of its option to buy out the Russian business. Rather than taking full control now it will instead acquire 25% now and the remaining 25% in a year.

The first 25% will be valued at 9 times 2009 EBITDA with an additional 2.25 times the difference between 2009 and 2007 profits. Given the group has said this will cost around £140m, the implied profits of the Russia business are around $58m (which is $10m more than we were forecasting they would be). SSL has an option over the final remaining 25% at 9 times 2010 EBITDA - so may cost another £85m based on the rate profits in Russia are growing.

In total then SSL will eventually have paid around $500m to own this business, considerably more than the $360m we thought, but then its profits are considerably higher than we were forecasting ($58m rather than $48m in 2009).

The revised terms presumably have the benefit of retaining the management, and keeping them incentivised. With the way the Russian business is growing this might seem understandable. Also it gives SSL more time to fully integrate the business, albeit this decision has come at a price.

[As regards earnings], for the 2009/10 and 10/11 years we originally had 100% of Russian profits coming in (which is very accretive), but with the staggered purchase this will now need partial reversing. Hence a small downgrade to each of those years.

Analyst Chas Manso de Zuniga at Evolution Securities said:

Today's announcement gives SSL a bit more financial protection. Essentially the only way for the local operators to earn more is to grow the business. If profits do not improve from the 2009 level, the new cost is the same as the old cost (but losing the time value of money for half). The local operators of BLBV have clearly done an extremely good job. SSL is learning how to operate in Russia with their help. It is critical to ensure solid foundations are built for what should be a long-term growth driver for the group. Keeping those with the expertise incentivised to for at least another year makes sense.

With the overall stock market weaker, SSL's shares have dipped 6p to 761.5p.

Sign up for the Guardian Today

Our editors' picks for the day's top news and commentary delivered to your inbox each morning.